* China rejects exchange rate and reserves criteria
* G20 official says China alone in its opposition
* Sources says down to ministers to reach indicators deal
* Fed, BoJ defend loose monetary policy
(Adds Sarkozy quotes)
By Daniel Flynn and Abhijit Neogy
PARIS, Feb 18 (Reuters) - China rejected plans on Friday to use real exchange rates and currency reserves to measure global economic imbalances, casting heavy doubt on the ability of Group of 20 major economic powers to reach agreement.
Speaking shortly before the start of a two-day meeting of finance ministers and central bankers, Chinese Finance Minister Xie Xuren also said the G20 should use trade figures rather than current account balances to assess economic distortions.
G20 countries, which together account for 85 percent of world economic output, are trying to agree a set of measurements as a basis for economic policy guidelines to avoid a repeat of the 2008 global financial crisis.
"We think it is not appropriate to use real effective exchange rates and reserves," Xie said at a meeting with Russian, Brazilian and Indian counterparts.
The hardline Chinese stance highlighted splits over how to define economic imbalances and prescribe action to remedy them, a key aim of France's G20 presidency.
A G20 official said China was the only country which spoke against accepting the list of indicators.
"I cannot tell you what will happen tomorrow. Nobody knows," he said. "No-one is trying to push China into a corner."
Two other G20 sources said negotiators had failed to reach agreement on a list of indicators by which to measure imbalances in the global economy and would leave it up to their finance ministers to try and seal a deal on specifics on Saturday.
Even then, agreement was uncertain, they said.
French President Nicolas Sarkozy, who holds the G20 presidency this year, urged ministers not to get sidetracked by the indicators dispute and welcomed the fact that China had agreed to host a G20 seminar on reforming the international monetary system in Shenzhen in late March.
"I want to avoid your debates getting bogged down in interminable discussion about these indicators, which are distracting us from the essentials," Sarkozy said in a speech.
The European Union's economic affairs commissioner, Olli Rehn, said the right indicators to tackle global imbalances included the current account, the real effective exchange rate and currency reserves as well as public and private debt.
"Especially, the current account account and the real effective exchange rate are essential," Rehn told reporters.
Canadian Finance Minister Jim Flaherty said there was consensus on two indicators measuring public and private debt and negotiations were continuing on other measurements.
But even if all the yardsticks are agreed, there is no sign of numerical targets even being broached.
Sarkozy told the ministers that economic policy coordination was the only way forward. "Giving priority to national interests would be the death of the G20," he said.
France has also run into opposition with its two other G20 priorities -- greater transparency and regulation of commodities prices and reform of the international monetary system.
COMPROMISES
Differences over the causes of and cures for global economic imbalances were also on display at a public debate among the world's top central bankers on Friday.
Bank of England Governor Mervyn King, reflecting the view of many Western policymakers, said the world risked protectionism or another financial crisis if policymakers failed to reduce currency distortions and other imbalances.
Chinese central bank governor Zhou Xiaochuan said Beijing would decide the pace of the appreciation of the yuan and would not be swayed by pressure from other countries.
Behind closed doors, senior officials wrangled over possible compromises to solve the indicators conundrum.
One option mooted would allow China to opt out of the balance of payments criterion and use its trade balance instead.
But Flaherty said Canada opposed that and the two G20 sources said an opt-out was a non-starter.
The G20 official said China's opposition had left G20 deputies with limited options to suggest on Saturday: either accept the four indicators or reject them; introduce a hierarchy where some indicators count more than others or use a time delay for their gradual introduction.
With world shares near 30-month highs, investors seem content for the G20 to take its time, whereas at the height of the crisis two years ago markets were baying for policy action.
AT ODDS ON MONETARY POLICY
In a public debate before the G20 meeting, the U.S. and Japanese central bankers defended their easy money policies against criticism from some emerging countries that they were fuelling disorderly capital flows and commodity price spikes.
U.S. Federal Reserve Chairman Ben Bernanke said faster growth in emerging markets and "the maintenance of undervalued currencies by some countries" had contributed to price rises and unsustainable patterns of global spending.
Bank of Japan Governor Masaaki Shirakawa acknowledged that loose monetary policy in the developed world was pushing capital into emerging economies and helping inflate commodities prices but said it was necessary nonetheless.
Emerging powerhouses such as China have already raised interest rates to combat inflation and complain that "hot money" risks destabilising their economies, pointing the finger at the Federal Reserve's money printing to pump prime its economy via a $600 billion bond purchase programme.
In turn, Washington has been urging China to let the yuan rise faster, which it says is vital for balanced global growth.
But People's Bank of China Governor Zhou said: "External pressure has never been an important factor of consideration and we have never paid special attention to it." (Additional reporting by Toni Vorobyova, Gui Qing Koh, Louise Egan, Julien Toyer, Catherine Bremer, Toni Vorobyova, Glenn Somerville; Writing by Paul Taylor and Mike Peacock)